Typically, a fiduciary relationship arises when one party places special confidence and trust in another, who then becomes obligated to act with due regard for the interests of the first party. While the law varies slightly from state to state, courts have been reluctant to impose fiduciary duties on banks in their dealings with consumers. As the Supreme Court of Ohio explained, “advice given by a creditor to a debtor in a commercial context in which the parties deal at arm’s length, each protecting his or her respective interests, is insufficient to create a fiduciary relationship.” By enacting the unfair, deceptive or abusive acts or practices (UDAAP) provisions in the Dodd-Frank Act, Congress initiated a process that appears certain to change the nature of the relationship between financial institutions and their consumers, creating something more than an arm’s length business negotiation but less than a fiduciary relationship.
Commentators have suggested that the UDAAP definition of abusive conduct comes close to, but stops short of, creating a fiduciary duty requiring financial institutions to act in the interests of their consumers. Under the act, an abusive act or practice is one which: “(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of—(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”
Surprisingly, given that the UDAAP definition marks a clear departure from prior law, the Consumer Financial Protection Bureau (CFPB) has offered little analytical guidance regarding the prohibition of abusive acts beyond confirming that “the legal standards for abusive, unfair, and deceptive each are separate.” However, the language of the definition indicates that the CFPB intends to focus on the consumer’s state of mind.
The first prong of the definition of “abusive” prohibits financial institutions and their service providers from “materially interfering” with a consumer’s ability to understand a term. This appears to be aimed at preventing affirmative acts that result in deception. However, the definition does not include any state-of-mind requirement for the financial institution. Therefore, while the financial institution’s interference must be material, it need not be intentional. In contrast, the consumer’s state of mind, couched as the consumer’s “ability to understand” is directly relevant to the inquiry.
The second prong of the definition is similarly focused on the consumer’s subjective state of mind. It forbids a financial institution from taking “unreasonable advantage” of the consumer’s “lack of understanding” with respect to the material risks or the terms of a financial product or service, the consumer’s lack of ability to protect his or her “interests;” and the consumer’s “reasonable reliance” on the financial institution to act in her interest. Thus, in order to avoid taking “unreasonable advantage” of a consumer, a financial institution must take steps to understand the extent to which its customers comprehend the terms of, and risks involved in, a proposed transaction. The institution also must assess whether or not the consumer is reasonably anticipating that the institution will act in her best interest.
In order to avoid a UDAAP violation under the first prong of the definition of “abusive,” financial institutions must ensure that the terms of their documents are clear and easily understood. Compliance with the second prong is more problematic. It appears to require that financial institutions gain an understanding of each individual consumer’s state of mind and factor that understanding into their decision making. By imposing obligations of this type, UDAAP dramatically alters the nature of the relationship between a financial institution and its consumer-customers. Plainly, UDAAP requires more than the good faith and fair dealing obligations implied in every contract, but less than a full-blown fiduciary duty. Given the subjective nature of this obligation, the scope of the abusive standard will, at least in the near term, remain amorphous.
The CFPB has apparently chosen not to exercise rulemaking authority to give any additional meaning to the definition. Instead, it intends to examine the acts of financial institutions on a case-by-case basis. Over time, this process may yield some degree of certainty, but, in the near term, the uncertainty surrounding the precise nature of the obligations imposed through the definition of abusive practices will almost certainly drive financial institutions to adopt careful and conservative marketing practices and to focus sales efforts on more traditional and less risky products.